What are Statutory Financial Statements?
What are the statutory financial statements? Depending on the jurisdiction of incorporation, you will have to submit a set of financial statements that reveal details about your company. The United Arab Emirates is one of the countries that require the presentation of annual statutory financial statements every year. What do you need to know to make sure you fulfil proper compliance? We’ll go through the details.
What is included in statutory accounts?
Statutory financial accounts are all the financial statements for your enterprise. These statements have information about your entity’s income, financial health and more. What are these documents, do you ask? They are the consolidated financial statements:
No matter the size of your entity, a balance sheet is critical for understanding your financial health. A common way of preparing the balance sheet is by using the T-account method, which puts assets on the left side with liabilities and shareholder equity on the right. You then try to balance both sides of the balance sheet throughout your calculations.
Another one of the three crucial financial statements in accounting is the income statement. If you’ve ever heard of a Profit & Loss statement or a P&L for short, rest assured that this is precisely what we’re talking about. The income statement centres on tracking your company’s revenues and expenses during your chosen accounting period, whether it be quarterly, semiannually or annually. That’s why you can also sometimes hear the term statement of revenues and expenses.
Cash Flow Statement
The last of the three primary financial statements is the cash flow statement. The cash flow, as it implies, demonstrates “...the net amount of cash and cash-equivalents being transferred into and out of a business.” Why is cash flow so important? It’s because an entity’s ability to provide value to its shareholders comes from its ability to maintain cash flow after outflows to maintain its capital and shoulder operating activities, which is called free cash flow (FCF). There are three types of cash flow. Operating cash flow comes from your enterprise activities; investing cash flow is all cash coming from making investments in other business ventures or capital. Finally, financing cash flow includes any payments your enterprise makes as well as any earnings from issuing equity or debt. You will have to look at them all within the cash flow statement.
Statement of Changes in Equity
Besides your balance sheet, cash flow statement and income statement, you will also have to present a statement of changes in equity. In the United States, you will often hear the term retained earnings statement or a statement of shareholders’ equity as some of the potential synonyms for this statement. This statement, depending on the financial reporting standard, can either be a standalone document in the income statement or balance sheet or be of its own. It provides an update of the volume of the earnings a company holds “...in reserve in order to invest in future projects rather than distribute as dividends to shareholders.” This statement gives an idea of how a company aims to use its profits to propel growth, whether it be to reinvest back into the firm or to pay off any debt they have.
Why jurisdiction matters for statutory financial statements
Along with the essential financial statements, there are some other crucial pieces to statutory financial statements. As we previously mentioned, the key to statutory financial statements is the jurisdiction. Every country will have specific requirements for how to prepare the documents, but the first thing to determine is what set of financial reporting standards to follow. That’s because it will come into play later. There are two primary financial reporting standards, GAAP (Generally Accepted Accounting Principles) and IFRS.
The GAAP standards are most commonly used in the United States, and all companies that publicly trade in the United States must comply with them. IFRS, or the International Financial Reporting Standards, is the international equivalent that currently applies in 120 countries, including the United Arab Emirates and the European Union. IFRS intended to standardise accounting reports across countries. While the US Securities and Exchange Commission is still not going to move over to IFRS, they have made efforts to allow companies to supplement information prepared under IFRS standards in place of sections that would have had to be prepared under US GAAP rules.
Depending on whether you have to follow GAAP or IFRS accounting standards, the statements and formulae you use to prepare your financial statements will meet those guidelines. You explain all of this methodology in the Notes to Financial Statements along with any assumptions you end up making for your calculations. For compliance purposes, it will be necessary for a statutory auditor to know if you prepared your statements using US GAAP or IFRS.
How do you make a statutory report?
To make sure you complete the mandatory financial statements we listed above and the Notes to Financial Statements, our team of expert auditors will help you prepare your statutory financial statements. They will then work through the Report of the Statutory Auditor needed to finalise those numbers. Whether you are looking for help in finishing your annual declarations or for periodic maintenance all year long, we offer the bespoke solution to meet your needs. Are you ready to start preparing your statutory financial statements for the next reporting period? Contact us today.